Just mentioning Section 727 of the Bankruptcy Code makes debtor attorneys cringe and bankruptcy trustees puff out their chests. This section deals with the discharge in a Chapter 7 case and is referred to when discussing a “total denial of discharge.”

Very scary stuff!

Section 727 is simply entitled “Discharge,” and its provisions only apply to Chapter 7 bankruptcy cases.

This Section starts with a very positive, hopeful, and beneficial general rule:

(a) The court shall grant the debtor a discharge. . .

But then it adds an ominous caveat “, unless—”.

It’s the stuff after the “unless” that gives Section 727 its fangs. There are twelve exceptions to the rule granting discharge that are enumerated in Section 727. Let’s take a look at them:

  • (1) the debtor is not an individual

Businesses may file Chapter 7 bankruptcy, but only an “individual” can receive a bankruptcy discharge. For bankruptcy purposes, an individual is a subset of a person, and is distinct from a partnership or a corporation. See 11 U.S.C. §101(41). Only real live human beings (“individuals”) may receive a bankruptcy discharge.

  • (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
    • (A) property of the debtor, within one year before the date of the filing of the petition; or
    • (B) property of the estate, after the date of the filing of the petition;
  • The bankruptcy court may deny a discharge to the debtor when he “shuffled” property around to unfairly or fraudulently keep it from creditors or from the trustee. This power under this provision is limited to a one year “look back.”
  • (3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;

The bankruptcy court may deny a discharge to the debtor when records are hidden, falsified, or destroyed.

  • (4) the debtor knowingly and fraudulently, in or in connection with the case—
    • (A) made a false oath or account;
    • (B) presented or used a false claim;
    • (C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
    • (D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs;

A Chapter 7 bankruptcy case relies on the honest cooperation of the debtor. The debtor is expected to provide truthful information on his bankruptcy schedules, answer truthfully and to the best of his ability at the 341 meeting, and provide information, records, and/or property requested by the trustee.

(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities;

A debtor must explain losses or deficiencies in such manner as to convince the court of good faith and business-like conduct. Flippant and evasive answers to a property inquiry (such as “I dunno,” or “it just vanished”) may cause the trustee to seek a denial of a bankruptcy discharge.

(6) the debtor has refused, in the case—

  • (A) to obey any lawful order of the court, other than an order to respond to a material question or to testify. . .

The mere failure to obey a court order is insufficient to deny a discharge under this section; there must be a finding of willful refusal by the debtor.

(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider;

This section applies where the debtor commits one (or more) of the acts which would result in denial of discharge in a personal case if such act occurred in a case involving an insider of the debtor. This typically involves a case of a corporation where the debtor was an officer and/or director of the corporation.

(8) the debtor has been granted a [Chapter 7 or 11] discharge. . . in a case commenced within 8 years before the date of the filing of the petition;

(9) the debtor has been granted a discharge [in a Chapter 12 or 13 case] commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least—

  • (A) 100 percent of the allowed unsecured claims in such case; or
  • (B)
    • (i) 70 percent of such claims; and
    • (ii) the plan was proposed by the debtor in good faith, and was the debtor’s best effort;

The Bankruptcy Code requires the debtor to wait several years between bankruptcy discharges. To be eligible for a Chapter 7 discharge, the Chapter 7 case must be filed eight years after a Chapter 7 or 11 case was filed, and six years after a Chapter 12 or 13 case was filed (unless certain conditions exist). Note that these dates are measured between filing dates, and not from the date the prior case was discharged or closed.

(10) the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter;

The bankruptcy court may approve the debtor’s application for waiver of bankruptcy discharge. A waiver prevents any of the debtor’s debts from being discharged. A waiver does not dismiss the case or stop the trustee from liquidating/administering assets.

(11) after filing the petition, the debtor failed to complete an instructional course concerning personal financial management. . .; or

For Chapter 7 debtors, the certificate evidencing completion of the personal financial management course must be submitted to the bankruptcy court no later than 45 days after the date of the first scheduled meeting of creditors. Otherwise the court will close the case without discharge.

(12) the court after notice and a hearing. . . finds that there is reasonable cause to believe that—

  • (A) section 522 (q)(1) may be applicable to the debtor; and
  • (B) there is pending any proceeding in which the debtor may be found guilty of a felony of the kind described in section 522 (q)(1)(A) or liable for a debt of the kind described in section 522 (q)(1)(B).

Section 727(a)(12) is hard to decipher. Essentially, this section directs the bankruptcy court to consider whether Section 522(q)(1) is applicable before granting a discharge.

That section places a limit of $125,000 on the debtor’s homestead exemption where the debtor was convicted of certain felony acts.

It protects the integrity of the bankruptcy process and actions that would result in a denial of discharge are things like hiding assets, failing to maintain financial records, refusing to turn over records, and refusing to cooperate with the trustee in the administration of the estate.